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A new proposal would amend changes made to ERISA less than a year ago that have proved to be detrimental to ESG investing.

By Jean-Philippe Brisson, Paul A. Davies, Nicola Higgs, Malorie R. Medellin, and Deric Behar

In a sweeping reversal of Trump-era policies, the US Department of Labor (DOL) has issued a proposed rule, Prudence and Loyalty in Selecting Plan Investments and Exercising Shareholder Rights (the Proposal), that would allow retirement savings plans to choose investments using analyses that incorporate climate change risks and other environmental, social, and governance (ESG) criteria.

The Proposal, if adopted, would amend the DOL rule Financial Factors in Selecting Plan Investments (the Rule), which was published in November 2020. The Rule adopted amendments to certain provisions of the “investment duties” regulation under Title I of the Employee Retirement Income Security Act of 1974, as amended (ERISA), and required fiduciaries of pension plans (and other benefit plans covered by ERISA) to choose investments “based solely on pecuniary factors” relevant to a particular investment. In effect, the Rule was premised on the idea that ESG factors are at odds with financial factors and fiduciary responsibilities of plan sponsors, and therefore plan fiduciaries should be restricted from making investment decisions based on ESG factors that are not primarily “pecuniary in nature” (see this Latham post for more information).

The FCA is proposing a disclosure regime for asset managers, life insurers, and pension providers.

By Paul Davies, Nicola Higgs, Victoria Sander, David Berman, Anne Mainwaring, and Charlotte Collins

On 22 June 2021, the FCA published a Consultation Paper (CP21/17) on introducing climate-related financial disclosure rules and guidance for asset managers, life insurers, and FCA-regulated pension providers. The disclosure requirements would be consistent with the Task Force on Climate-related Financial Disclosures (TCFD) recommendations.

The FCA plans to introduce the disclosure requirements in a new ESG Sourcebook in the FCA Handbook. The regulator anticipates that this Sourcebook will expand over time to include new rules and guidance on other climate-related topics and wider ESG considerations.

Board members are expected to have adequate knowledge and understanding of climate-related and ESG risks.

By Nicola Higgs, Paul A. Davies, and David Berman

Legislators and regulators around the world have long recognised that one of the most effective ways to drive change is by focusing the minds of management — specifically by attaching individual accountability for ensuring that an organisation meets expected standards. Transitioning to net-zero carbon emissions has now become a critical priority for many governments, and the spotlight is shining on the boards of financial institutions and companies to drive that change.

This blog post highlights recent developments in the EU in this regard. At a time when standards on climate and environmental, social, and governance (ESG) issues are converging globally, these developments will be informative to global organisations wanting to embed best practices in governing the transition.

The CFTC continues to demonstrate a commitment to using its regulatory mandate to combat climate change risks to the US financial system.

By Yvette D. Valdez, Douglas K. Yatter, Jean-Philippe Brisson, Paul Davies, Nicola Higgs, and Deric Behar

On March 17, 2021, the Commodity Futures Trading Commission (CFTC) announced the establishment of an interdivisional Climate Risk Unit (CRU) to assess the risks to US financial stability posed by climate change. The CRU aims to be a catalyst for change by highlighting the derivatives markets’ role in understanding, pricing, and addressing climate-related risks, as well as its role in the transition to a low-carbon economy.

The announcement was made by Acting Chairman Rostin Behnam, whose efforts to steer the CFTC’s focus toward climate-related impacts on the financial system led to the publication of a landmark report by the CFTC’s Climate-Related Market Risk Subcommittee of the Market Risk Advisory Committee in September 2020. The report, titled “Managing Climate Risk in the U.S. Financial System” (the Report), makes 53 recommendations to help mitigate climate risk to financial markets. See Latham’s discussion of the report here.

The US prudential regulator is paying attention to climate risks, and will likely act to mitigate those risks if they threaten financial stability.

By Alan W. Avery, Pia Naib, Deric Behar, and Kristina S. Wyatt

In its November 2020 Financial Stability Report (the Report), the Board of Governors of the Federal Reserve System (Federal Reserve) acknowledged, for the first time in the Report’s history, the impact of climate risks on financial stability. The Report, which aims to provide a current assessment of the resilience of the US financial system on a biannual basis, reflects Chairman Jerome Powell’s November 5, 2020, statement, in which he said that the Federal Reserve is “actively … getting up to speed” on climate risks and impacts to the financial system.

The UK Government presents initiatives designed to green the UK economy and bolster attractiveness as an international financial centre.

By Paul A. Davies and Michael D. Green

On 9 November 2020, Rishi Sunak, Chancellor of the Exchequer, announced several initiatives designed to help the UK tackle climate change, while maintaining its position as an “open, attractive international financial centre” after the Brexit transition period ends.

Most importantly, the Chancellor announced that the UK will require corporate disclosures to align with the Task Force on Climate-related Financial Disclosures (TCFD) by 2025 at the latest. In doing so, the UK will become the first country in the world to move past the “comply or explain” approach and make TCFD-aligned disclosure fully mandatory, in an effort to support climate-related transparency and the greening of the UK economy.

In its finalized rule amending ERISA, the DOL makes financial factors paramount in a fiduciary’s responsibility to investors.

By Paul A. Davies, Nicola Higgs, Kristina S. Wyatt, and Deric Behar

On October 30, 2020, the US Department of Labor (DOL) published Financial Factors in Selecting Plan Investments (the Rule) and a related Fact Sheet, a codification of the spirit, if not the exact words, of a controversial proposal issued by the DOL in June 2020 (the Proposal). The Rule adopts amendments to certain provisions of the “investment duties” regulation under Title I of the Employee Retirement Income Security Act of 1974, as amended (ERISA), and requires fiduciaries of pension plans (and other benefit plans covered by ERISA) to choose investments “based solely on pecuniary factors” relevant to a particular investment. The net effect is to restrict plan fiduciaries from making investment decisions guided by goals or policies other than achieving the highest possible return for investors. Non-financial goals would ostensibly include any environmental, social, or governance (ESG) factors that many investors consider important to their investment decision-making.

A watershed CFTC report highlights the dangers of climate change to the US economy, and provides a broad risk-mitigation roadmap.

By Jean-Philippe Brisson, Paul A. Davies, Nicola Higgs, Yvette D. Valdez, R. Andrew Westgate, Kristina S. Wyatt, and Deric Behar

On September 9, 2020, the US Commodity Futures Trading Commission’s (CFTC’s) Climate-Related Market Risk Subcommittee of the Market Risk Advisory Committee (MRAC) published Managing Climate Risk in the U.S. Financial System (the Report) — a first-of-its-kind publication from a US regulator focusing on the systemic threat that climate change poses to the stability of the US financial system.

The Report is the product of the collaborative effort of the CFTC and a diverse advisory panel of 34 market participants across industries and sectors, including investors; non-governmental organizations; investment banks; academic organizations; and insurance, agriculture, and oil and gas companies.

The Report calls on legislators and market regulators to overcome what it describes as “political inertia” and to take urgent and decisive action commensurate with the risks. To that end, the Report presents a broad range of concrete recommendations, designed to either directly or indirectly mitigate the risks that climate change poses to the US financial markets and long-term economic growth.

The PRA expands its supervisory expectations for firms on managing climate-related financial risk — publishing a Dear CEO guidance letter.

By Nicola Higgs and Anna Lewis-Martinez

On 1 July 2020, the PRA published guidance in the form of a Dear CEO letter to banks, insurers, and other PRA-regulated firms on managing climate-related financial risk. The letter builds on the expectations set out in the PRA’s supervisory statement on enhancing banks’ and insurers’ approaches to managing financial risks from climate change (SS3/19).

The CFRF’s practical Guide encourages UK regulated financial services firms to take active steps to manage climate-related financial risks.

By Paul Davies, Nicola Higgs, Sherryn Buehlmann and Anna Lewis-Martinez

Background

On 29 June 2020, the Climate Financial Risk Forum (CFRF) launched its guide to climate-related financial risk management (Guide) that will be useful for financial services firms to understand the risks and opportunities that arise from climate change. The Guide provides a voluntary framework for how to integrate these climate-related risks and opportunities into firms’ risk, strategy, and decision-making processes.